Domestic chores for King’s successor

David Stewart
’s claims that he will not stray from the path set by
Wal King
when he takes over as chief executive of
Leighton
next year have been received with a pinch of salt amid expectations he will soon make his mark on the construction group.

Mr Stewart is relatively unknown in the investment community, despite having been Leighton’s chief operating officer for more than a year, and Leighton yesterday said it had no immediate plans to wheel him out to investors. Although the company will hold a series of briefings between Mr Stewart and investors, none has yet been scheduled.

When Mr King’s departure was announced on Monday afternoon, Mr Stewart played down suggestions that it would be anything but business as usual when he takes over. But people who have worked with him at John Holland describe him as having a “very strong" leadership style and as a “very strategic" manager.

Once ensconced in the job, analysts believe Mr Stewart will tackle Leighton’s financial problems in the Middle East by reassessing its Al Habtoor Leighton joint venture.

Goldman Sachs believes Leighton could write down the carrying value of its 45 per cent stake in the venture, estimated at $1.2 billion, as soon as February, when the company reports interim results for 2011. “The likelihood of a such a write-down may have increased with the announcement of the new CEO," Goldman noted ­yesterday.

Although the Middle Eastern business generated a loss in 2010, Leighton did not write down its value, arguing earnings would soon rebound. But Goldman does not expect earnings to pick up quickly enough to prevent a write-down.

Leighton could offset any write-down with profits from a sale of a stake in its Indian construction business to a joint venture partner, assuming it makes several hundred million dollars from the sale, analysts said.

Meanwhile, Credit Suisse said it expected Mr Stewart’s appointment could lead to “differing views" in the medium term of the Leighton group’s strategy to pursue earnings growth from higher-risk overseas and developing markets.

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With more than one-third of Leighton’s work-in-hand (contracted but as yet uncompleted work up to five years from the reporting date) now derived from overseas markets, Credit Suisse says it would become “more positive" if the company found opportunities with the Australian construction market to expand its order book. The bank has a “neutral" rating on Leighton.

Some analysts believe Mr Stewart could also sell off Leighton’s property business, which reported a loss of $73 million in 2010, deepening the $59 million loss reported a year earlier. Ben Brownette, analyst at the Commonwealth Bank, said Leighton Properties had assets of about $363 million and was an obvious divestment because it was not a core business. “Property development before the global financial crisis seemed like a pretty good thing to do and clearly it’s not now."

Mr Brownette also argued that Leighton might need to undertake an equity capital raising or cut its dividends if Mr Stewart continued Mr King’s strategy of expanding in contract mining, because it required large capital investments.

“Leighton’s capital structure is wrong for this type of business," Mr Brownette said.